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Nokia Makes a Surprising Comeback in Smartphones

Leo Sun, The Motley Fool

Nokia (NYSE: NOK) Mobile sold 4.4 million smartphones during the fourth quarter of 2017 and claimed 1% of the global market, according to research firm Counterpoint. That figure seems tiny, but it makes Nokia the 11th largest smartphone brand in the world, putting it ahead of HTC, Sony, Alphabet's (NASDAQ: GOOGL) (NASDAQ: GOOG) Google, Lenovo, and Asus.

Nokia's comeback was fueled by robust sales in the U.K., Russia, Vietnam, and most Middle East markets. It ranked in the top five across all of those markets and hit third place in the U.K. for the first time during the quarter.

Four Nokia 6 phones stacked upright.

Nokia 6. Image source: Nokia.

Nokia Mobile sold 8.7 million smartphones in 2017, its first full year after being "reborn" under HMD Global in mid-2016. That's an incredible market debut compared with the iPhone and Nokia Lumia -- which sold 1.7 million and 2.9 million devices, respectively, in their first full year of sales.

This seems like great news for Nokia, but it only generates licensing revenue from sales of these smartphones, because of the convoluted history of its mobile brand. Let's look back at what happened to the Nokia brand over the past decade, and what its rebound in the mobile market means for investors.

2007-2014: Losing the smartphone market

When Apple (NASDAQ: AAPL) launched the iPhone in 2007, Nokia controlled over half of the global market for smartphones, which were mostly considered pricey gadgets for enterprise users. In 2008, Google introduced Android, a free open-source operating system (OS) for original equipment manufacturers that wanted to quickly launch new devices to challenge the iPhone.

A man in a suit looks at a red line crashing through the floor, indicative of a plummeting stock chart.

Image source: Getty Images.

Nokia realized that Apple was developing the iPhone as early as 2005, but it didn't launch a pre-emptive strike, because of the company's conservative management, overconfidence in its brand, and misplaced faith in its Symbian OS. Nokia also failed to understand that Apple and Google were pivoting smartphones toward mainstream consumers instead of enterprise ones.

By 2013, Nokia's share of the smartphone market had dropped to about 2%. The mobile market had become a duopoly between Apple and Google, while mainstream consumers and app developers shunned Symbian.

In 2014, Microsoft (NASDAQ: MSFT) bought Nokia's handset business as a first-party platform for Windows Phone, which was also struggling against iOS and Android. That eleventh-hour effort flopped, resulting in a multibillion-dollar writedown for Microsoft a year later, and Nokia/Microsoft's share of the smartphone market plunged below 1%. Last October, Microsoft admitted that Windows Phone was a lost cause and announced that it would stop developing new software and hardware for Windows 10 Mobile.

2015-2018: An unexpected comeback

When Nokia sold its handset unit to Microsoft, it didn't sell its brand. Instead, it signed a non-compete agreement with Microsoft that barred it from selling Nokia-branded devices until the end of 2016. That's why Microsoft rebranded its Nokia Lumia devices as "Microsoft Lumia" in late 2014.

After sellling its handset unit to Microsoft, Nokia turned its attention toward its networking equipment business. It then formed a new unit, Nokia Technologies, which housed its brand licensing business. Since Nokia sold all its mobile device manufacturing facilities to Microsoft, it couldn't simply start producing smartphones again.

Yet Nokia remained interested in mobile devices. In late 2014, Nokia partnered with Foxconn to create the N1 Android tablet, a Nokia-designed device that Foxconn manufactured, distributed, and sold. Foxconn shouldered all the production costs and reaped the profits, while Nokia received licensing payments.

Nokia realized that it could apply the same strategy to smartphones after its non-compete agreement with Microsoft expired. That's why private equity fund Smart Connect formed a new company -- led by former Nokia executives -- called HMD Global in 2016.

An up-close detail of a Nokia 8.

Nokia 8. Image source: Nokia.

HMD obtained the exclusive global license (excluding Japan) to create Nokia-branded phones and tablets over the next decade, and it signed a contract to exclusively source the production of the devices to Foxconn subsidiary FIH Mobile.

HMD and FIH Mobile then co-purchased Nokia's feature-phone business from Microsoft, completing the "rebirth" of Nokia's handset unit under a new banner.

HMD launched its first device, the Android-powered Nokia 6, for the Chinese market in early 2017. The market reception was surprisingly warm, and HMD subsequently launched the Nokia 2, 3, 5, 7, and 8 in other markets.

Counterpoint's latest numbers suggest that these devices are winning over consumers, thanks to HMD's embrace of Android, low prices, positive reviews, and the nostalgic appeal of the Nokia brand.

What does this mean for Nokia?

Nokia Technologies' revenue rose 57% annually in fiscal 2017 and accounted for 7% of its top line. The unit's operating profit surged 94% and accounted for 43% of Nokia's operating income.

Nokia doesn't disclose how much of the total comes from HMD's licensing payments, but rising sales of its new smartphones would definitely bolster the business. The growth of that high-margin business would offset the softer growth of its core Nokia Networks business, which still faces tough competition from rivals such as Huawei and Ericsson.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.